Chapter 11: Are Bunker Adjustment Factors Aimed at Revenue-making or Cost Recovery? Empirical Evidence on the Pricing Strategies of Shipping Lines
Theo Notteboom and Pierre Cariou 11.1 Introduction For liner shipping activities, not least container shipping, bunker oil is a considerable expense. According to Germanischer Lloyd (Lloyd’s Shipping Economist, 2008a) or the World Shipping Council (Lloyd’s Shipping Economist, 2008b), the fuel bill for an 8000 TEU (twenty-foot equivalent unit) ship accounts for around 50–60 per cent of its operating costs, a 33 per cent increase compared to three years previously. This impressive growth has led shipping lines to adapt their operating practices on bunker management (Notteboom and Vernimmen, 2009), using cheaper fuel grade alternatives, improving vessel design, reducing vessels’ speed and adding capacity or dropping the number of ports of call in order to keep a weekly frequency in services, and hedging against future bunker price variations. This chapter focuses on another traditional approach used by shipping lines to hedge against the risks of sharp and temporary fluctuations in bunker costs and to mitigate their impact on the overall freight rate: levying a specific surcharge on shippers known as the Bunker Adjustment Factor or BAF. BAF aims at passing the fuel costs on to the customer through variable charges, and is controversial. Shipping lines have more than once argued that the increase in bunker prices, especially in the short term, is only partially compensated for through surcharges to the freight rates and that it still affects their earnings negatively. In contrast, shippers’ organizations such as the European Shippers’ Council have always objected that the way BAFs are determined is opaque,...
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